Regulations are Killing Small Businesses

Regulations are Killing Small Businesses

© David Burton 2014

Small Business Regulations

     “When governments impose regulations on small businesses that drive up the cost of doing business, it’s like imposing a tax.. .’
     “And when those regulations hit small businesses hardest, it’s like imposing a tax on small businesses. That’s why whenever small businesses are polled, . . . business owners regularly put regulatory burdens at or near the top of concerns. And it’s not just business owners’ perception. . . . researchers and even World Bank studies have shown that regulations adversely impact small businesses, in four ways:

  • Regulatory compliance puts a disproportionately large burden on small companies because they don’t have as much revenue to spread the costs over, as do large firms.
  • Regulations make small businesses less competitive against foreign competition.
  • Regulations add uncertainty, which keeps small businesses from investing in capital purchases, services and hiring.
  • New regulations add complexity and often have unintended consequences.
       - - -
     “. . .the cost per employee of complying with regulations is $10,585 for small businesses with fewer than 20 employees, but only $7,755 for larger companies. Almost 90% of businesses in the United States have under 20 employees, so that means the vast majority of businesses are affected adversely — with small businesses paying over 36% more per employee.” (Ref. 1)

     Government regulations, even though well intentioned, frequently produce great harm. In recent years, this has been the case with government regulations and their impact on small businesses.

     One unintended consequence of the introduction of rules and regulations that were intended to control big banks and prevent any adverse effect on the American economy from their possible misdeeds has been the reduction in the number of small banks, even those with squeaky clean balance sheets. “As unintended consequences go, it’s a doozy.
     “The end result of the crackdown on big banks – the alleged villains of the financial crisis – is fewer small banks.
     “The number of FDIC-insured institutions has fallen below 7,000 for the first time since federal regulators began keeping track, during the Great Depression. The banks that have disappeared are almost exclusively those with less than $100 million in assets [Emphasis mine] – a lot of money for a human, but small change for a bank.
      - - -
     “The road to small business hell is paved with the best of government intentions.
     “You may recall that in the dark days of 2011 big banks were painted as the bad guys by the media, Occupy Wall Street protesters and grandstanding legislators. More regulations, this amateur chorus concluded, was what was needed.
     “The problem is that a rising tide of regulation sinks small craft first. Big banks have the scale to weather the added costs that each new wave of regulation sends over their bows. The little banks that served as life boats for fee-conscious consumers have been swamped by the 2,319 pages of Dodd-Frank and its grand inquisitor, the Consumer Financial Protection Bureau, the brainchild – I use the term loosely – of U.S. Sen. Elizabeth Warren.” (Ref. 2)

     So what is the impact of more government regulations on entrepreneurship? After all, entrepreneurs create the new products and services that fuel the growth engine of a country’s economy. Small businesses are the major creator of new jobs. But, “World Bank economists recently showed that entrepreneurs create fewer new businesses in countries with regulations that make starting companies more difficult.
     “Reducing regulation also enhances the performance of small companies. For instance, researchers found that efforts to simplify the new business formation process in Mexico boosted small business employment by nearly 3 percent.
     “Economists believe that regulation hurts small business in four ways. First, . . . regulatory compliance exerts a disproportionately large burden on small companies because the fixed costs of adhering to rules can be spread out over more revenue in large firms than in small ones. {It is} estimated {that} the per employee cost of complying with Federal regulations {is} $10,585 for businesses with fewer than 20 employees but only $7,755 for businesses with more than 499 workers.
     “Second, government regulations make small businesses less competitive against foreign competition. . . . government regulations create ‘inefficiencies in the structure of American enterprises;’ adversely affecting ‘the international competitiveness of domestically produced American products and services;’ and leading to 'the relocation of production facilities to less regulated countries.’
     “Third, adding regulations creates uncertainty, which keeps small business owners from investing and hiring. Because few business owners can predict the scope or impact of new regulations, they often delay buying capital equipment or adding workers as they wait to see the impact of new regulation.
     “Fourth, new regulations often have unintended consequences. Consider the new health care law, which requires businesses to file 1099 forms for all payments to a single payee exceeding $600 per year beginning in 2012. The effort to increase health insurance coverage has resulted in an unrelated tax filing that imposes heavy compliance costs on small business owners, an outcome that even surprised many in Congress who voted to pass the law. (Ref. 3)

     The requirement to file 1099 forms for all payments to a single payee exceeding $600 per year is so ridiculous that it adversely impacts even homeowners who rent apartments in their homes. If you fall into this category and have repairs or improvements that cost over $600 for any one contractor, you must file a 1099 form for each contractor. Pay for your tenant’s heat? - You must file a 1099 form. God help the trees in our nation’s forests!

     “The United States does not compare well with many industrialized nations on the dimension of small business regulation. The Organization for Economic Cooperation and Development (OECD) found that the U.S. had higher regulatory barriers to entrepreneurship, greater administrative burdens on small business owners, and higher barriers to competition than a number of other industrialized countries.
     “The regulatory burdens on U.S. small business are getting worse. Both the World Bank and the Global Entrepreneurship Monitor report that U.S. entrepreneurs faced more start up red tape in 2007 than in 2003.
     “American small businesses are now being adversely affected by two massive new laws: the Patient Protection and Affordable Care Act and Dodd-Frank Wall Street Reform and Consumer Protection Act. A recent Discover Card survey of small business owners indicates almost half of small business owners believe that new health care law is harmful to their businesses and only a little more than one quarter see it as beneficial. Respondents to a 2010 Discover Card survey showed that 55 percent of small business owners believe that the financial reform bill will make small business finance more difficult, while only 9 percent think the new law will make it easier.” (Ref. 3)

     “For years politicians have bickered about the best prescriptions for the economy. From the right, it's lower taxes; from the left, the remedy is stimulus spending and government programs. Lost in the cacophony is one solution to our economic challenges about which both Republicans and Democrats claim to agree: rolling back the rising tide of red tape strangling small businesses.
     “The ever-growing thicket of regulations businesses must contend with is a hidden tax that is stifling economic growth. Washington's bureaucratic machine costs the American economy somewhere in the neighborhood of $1.75 trillion each year according to a recent study commissioned by the Small Business Administration's Office of Advocacy. That is more than the federal government takes in corporate and individual income taxes combined. [Emphasis mine]
     “Along with the billions spent on stimulus programs have come hundreds of new regulations that make it harder for businesses to grow and propel economic recovery. As one hand gives, the other takes away; and recently, it's taking a lot more. The trouble with regulation is that more is added every year, but very few government mandates are ever repealed. The combined weight of all the rules that have accumulated are crushing the economy—a death by a thousand cuts.
     “Last year alone, federal agencies issued 3,807 final rules [Emphasis mine] . . . A good way to measure the extent and complexity of the regulatory environment is how many pages it takes to explain what all the regulations mean. Last year . . . the Federal Register spanned more than 81,000 pages. That's enough to make a stack of paper as high as a three-story building and each year, the number grows. Today, the Federal Register spans 54 percent more pages than it did in the 1980s. [Emphasis mine]
     “More disturbing is the explosion of economically significant rules, those with an impact of more than $100 million. Over the last three years the average number of economically significant rules completed annually has risen by 75 percent. [Emphasis mine]
     "Washington has lost sight of the consequences that regulations have on businesses . . . Regulation hits small businesses the hardest. Small businesses cannot afford the legal and consultant teams used by big businesses to navigate complex regulations. . . Hurting small businesses, which create two out of every three net new jobs, is the quickest way to stifle job creation. [Emphasis mine]
     “Large companies' ability to absorb these costs relative to small businesses gives them a significant competitive advantage. By hindering small business growth, overregulation results in a less dynamic and innovative economy. In the long run, it's not government stimulus, but our ability to create and innovate that leads to prosperity. [ Emphasis mine]
     “We've only just hit the tip of the iceberg. Regulators are still working on dozens of new multibillion dollar regulations due out in the next year or two. Those pending rules will worsen our regulatory climate and further cripple economic growth and job creation. Lifting the regulatory burden on small businesses is essential to any credible program to get the economy back on track.” [Emphasis mine] (Ref. 4)

     One successful entrepreneur, “Fred Deluca, the founder of privately-held Subway Restaurants, said government regulations are hurting small businesses and that this environment has prevented entrepreneurs from creating value in the market. ‘If I started Subway today, Subway would not exist’ Deluca told CNBC's ‘Squawk on the Street’ . . .
     “Deluca said the environment for entrepreneurs in the U.S. has ‘continuously gotten worse because there are more and more regulations. It's tough for people to get into business, especially a small business.’” (Ref. 5)

     Government regulations are strangling America’s growth engine – America’s small businesses – and the number of government regulations is growing each year at an ever-increasing rate. The results – less job creation, less innovation, and a growing inability to compete in the world economy.

  1. The Small Business Tax: Government Regulations, Anita Campbell, Small Business Trends, 11 June 2012.
  2. No ‘Wonderful Life’ nowadays for small banks, Cornelius Chapman, Boston Herald, Page 21, 6 December 2013.
  3. Small Business’s Problem With Government Regulation, Scott Shane, Small Business Trends, 31 January 2011.
  4. Red Tape Is Strangling the Recovery, John Allison, US News, 19 October 2012.
  5. Subway 'Wouldn't Exist' If Started Today Due to Regulations: Founder Deluca, Paul Toscano, CNBC, 27 February 2013.


  6 January 2014 {Article 190; Undecided_34}    
Go back to the top of the page